Plastic packaging is buyout funds’ lucrative sin

Sonoco Products

05/05/2023 11:22

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Pamela Barbaglia
       LONDON, May 5 (Reuters Breakingviews) - Private equity
titans are having a dangerous love affair with plastic. After
investing over $15 billion in polluting packaging assets over
the past decade, heavyweight funds like Apollo Global Management
 APO.N , Carlyle  CG.O  and Triton are seeking to make their
investment theses greener by zooming in on
recyclable wrapping. Yet the world’s failure to reprocess
used plastic means the strategy could backfire.  
    The global packaging market is expected to top $1.5 trillion
by 2031, data from Allied Market Research shows. The plastic
packaging segment, set to be worth $484 billion by 2029
according to another study, should make up a third of that
total. That’s because consumers and companies have become
addicted to cheap and durable fossil fuel-based polymers to make
tubs, cling film and trays to store food, drugs and medical
equipment.     
    Despite a general slowdown in dealmaking in 2023, M&A
activity for plastic packaging players is still bubbling.
Private equity firm Leonard Green & Partners agreed on Wednesday
to sell a significant stake in U.S.-based ProMach, which Reuters
said could be worth $5 billion, to banker Byron Trott’s
investment firm BDT Capital Partners. French buyout group Wendel
 MWDP.PA  is exploring options for 2 billion euro Austrian
firm Constantia Flexibles, which serves the pharma industry. And
London-listed 3i  III.L  may soon kick off the sale
of Netherlands-based Weener Plastics, two banking sources told
Reuters Breakingviews.
    Not all plastic assets are equal. Companies focusing on
versatile materials that are in principle easy to recycle, such
as the polyethylene terephthalate (PET) widely used for soft
drink bottles, are more in demand. These assets may be valued at
10 times their 2023 EBITDA in a sale, bankers say, better than
the 7 times multiple currently assigned to listed peers like
Sealed Air  SEE.N  and Sonoco  SON.N . But companies relying on
materials more difficult to reprocess, such as the
polystyrene used for plastic foam cups or meat trays,
will only command low single digit multiples.   
    Investors’ sensitivity around specific compounds is
legitimate. The European Union is calling for all plastic
packaging to be recyclable by 2030, which means certain
wrappings will be driven out of the market. And private equity
funds want to land on the good side of the plastic transition.
Yet using recycling metrics to price packaging assets is
delusional: only 9% of global plastic waste is
actually reprocessed, according to an OECD report. The bulk ends
up in landfills, is incinerated, or gets dumped. That’s
because recycling such waste is expensive, complicated, and
results in products of lower quality than those made from virgin
plastic.
    Private equity firms’ attempts to sugar-coat their packaging
deals may work in the short term. But as plastic
pollution balloons, investors’ sentiment may turn. 
    Follow @pamela_msg on Twitter
    
    CONTEXT NEWS
    Private equity firm Leonard Green & Partners agreed on May 3
to sell a significant stake in U.S. processing and packaging
machinery provider ProMach to BDT Capital Partners. Financial
terms of the transaction were not disclosed. Reuters reported on
March 2 that ProMach could be valued at around $5 billion.  
    The United Nations’ Intergovernmental Negotiating Committee
is due to meet in Paris on May 29 for a second session of talks
to develop an international legally binding instrument to
reduce  plastic pollution. The first session took place in
November.   
    French investment group Wendel is working with advisers to
identify possible buyers for Austrian packaging firm Constantia
Flexibles, which produces flexible packaging for the consumer
and pharmaceutical industries, Bloomberg reported on Nov. 17,
citing people familiar with the matter. Vienna-based Constantia
could be valued at about 2 billion euros, the Bloomberg report
added.    
    The European Commission published a proposal on Nov. 30 to
update its packaging legislation and reduce packaging waste
across the bloc. Under the draft regulation, European Union
member states would need to reduce packaging waste per capita by
15% by 2040 and make all packaging recyclable by 2030.    
    Only 9% of plastic waste produced globally was recycled in
2019, while 49% ended up in landfills, 19% was incinerated, and
22% was either mismanaged or uncollected, according to an OECD
report.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Plastic money    https://tmsnrt.rs/3n1vGtD
Drowning in garbage    https://tmsnrt.rs/41FYvuH
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Lisa Jucca and Oliver Taslic)
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